Rules related to tax benefits on home loans simplified

Bakul Chugan, ET BureauFeb 16, 2009, 07.08am IST

Saving taxes is on everyone's mind these days. And if you are among those seeking avenues that could save a bit of the outgo in taxes, the avenue may just be right under your nose — your residence itself! Rental or ownership, your dwelling space can provide you a good chunk of tax benefits . Here is a sneak preview.

RENTAL ACCOMMODATION

Cost of living has risen tremendously over the last few years. While the expenses across the board have increased, it is the cost of renting an accommodation that deals a major blow to the pockets of most individuals. But one can claim tax exemption on the rent paid. Section 10(13A) of the Income-Tax Act provides for the house rent allowance (HRA) relief.

Thus, those residing in rented premises can claim a tax exemption on an amount that is least of the following three options: (a) HRA actually received from the employer (b) Rent paid in excess of 10% of salary (c) 50% of the salary (if residing in a metropolitan) else 40% of the salary.

Let's take the case of an individual who earns a basic salary of Rs 25,000 per month and an additional HRA of Rs 5,000 per month; taking the total salary to Rs 30,000 per month. Assume that the monthly rental paid for accommodation in the city of Mumbai is Rs 6,000.

The income tax exemption would thus be the least of (a) HRA actually received i.e. Rs 5,000 (b) Rent in excess of 10% of basic salary i.e. Rs 3,500 (Rs 6,000 - 10% of Rs 25,000) (c) 50% of basic salary i.e. 12,500 Since the least of the above is Rs 3,500 (option b); annually, an income to the tune of Rs 42,000 (Rs 3,500 * 12 months) shall be exempt from tax.

This section is meaningful only for those salaried employees who receive HRA as a part of their salary. Thus, in the above scenario, if no HRA is received from the employer i.e. HRA is 'zero' , there shall be no income exempt from tax since the least of the three options would then be 'zero' (option a).

OWNERSHIP

Owning a property can be highly beneficial, for tax purposes, provided the same has been purchased through a bank loan. House owners can claim an exemption from tax on not only the interest paid on the house loan but also on the principal amount repaid over a period of time.

INTEREST REPAYMENT

Section 24(b) of the I-T Acts allows interest repayment of up to Rs 1.5 lakh a year to be exempted from tax. As this exemption is available for each individual owning/coowning the house, it makes a good case for buying the property in joint ownership.

Let's assume that the annual interest liability is Rs 4 lakh, and the house is jointly owned by two owners, both the owners can claim an exemption of Rs 1.5 lakh each taking the total income exemption from tax to Rs 3 lakh.

However, it is important to note that tax exemption available to each owner is to the extent of interest actually repaid by the co-owner. The Rs 1.5 lakh limit on interest repayment is applicable in case of a single property that is being used by the owner. However, an individual does not enjoy such exemption from his annual income if he owns more than one house, as there is no such benefit on the repayment of interest on the subsequent houses.

This is because the subsequent houses are deemed to be earning rents for the owner. Thus, these properties would attract a notional rental income, which would be taxable in the owner's hands.

Notional rental income is the income that the property would have generated had it been actually let out by the owner. As this income is taxable in the owner's hands, the interest repayment claimed as exempt from tax shall be reduced from the notional rental income so arrived at.

PRINCIPAL REPAYMENT

If housing interest has been taken care of by Section 24(b), the all-time favourite section for tax-planners 80C takes care of the principal repayment. Principal repayment up to Rs 1 lakh can be claimed as exempt from tax by each of the co-owners of the house property provided the loan is taken from a recognised financial institution only. Any housing loan taken from relatives of friends is thus not eligible for the Section 80C deduction.